Homework answers / question archive / Bonds are nothing more than I

Bonds are nothing more than I

Economics

Share With

Bonds are nothing more than I.O.Us or debt notes

A firm planning an expansion and short of funds has two possibilities to raise the necessary cash. To dilute ownership by augmenting capital and issuing shares (which involves a number of steps with the Security Exchange Commission, the banks and stockholders committees) or simply apply for a public loan by issuing bonds.

Bonds will carry interest, as determined by the market, over a period fixed by the firm. At the end of this period (maturity), the Firm will reimburse the bond at face value and the deal is terminated.

Bear in mind that during the loan period the bonds my change hands several times. Their price will fluctuate as interest rates go up and down. However, the Firm will keep paying the same interest rate and will still reimburse the face value at maturity.